How to Insulate Your Business from Liability

Follow these steps to protect your personal wealth as a business owner.

Insulate your business through its legal entity formation

Many businesses are organized as sole proprietorships--which means there is no legal distinction between the owner and his or her business. This entity choice can be dangerous, because if the business gets sued, you as the owner are liable for 100% of the damages and defense attorneys' fees. A better choice would be a Limited Liability Company (LLC), which would create a separate legal identity for your business, with some of the tax benefits of a sole proprietorship. If your business is sued, the litigant can collect only from the business, and the corporate identity shields you, the owner, from becoming, in most cases, personally liable. A corporation or LLC can be structured, funded and operated so that the business' assets are not exposed to liability. There are other legal entities to choose from, and you should consult with your attorney to make sure the entity choice is the right fit for you and your business.

Insulate your business through adequate insurance

A business owner must purchase enough insurance to cover company assets and to protect you and your business in the event that you are sued. Even if you form a corporation or an LLC which shields your personal assets from liabilities, you still risk losing your business if disaster strikes. Insurance can reduce this risk. The most common and generally useful types of business insurance policies are property insurance and liability insurance.

Insulate your business with a legal audit

The bane of my profession is the "cost" of attorneys' fees. Many business owners are fiercely independent entrepreneurs who are dyed in the wool "do it yourselfers" who simply do not see the benefit of consulting with an attorney at ever step of the business, from cradle to grave. I am often asked why anyone would need a business lawyer to incorporate, when you can do it yourself over the internet for less than a hundred bucks. A legal audit to determine whether your business is in compliance with the law or is at risk for liability and lawsuits will "fix" unprotected areas and help insulate you and your business from being sued. The cost is nominal, and a stitch in time saves nine!